From the Naked Capitalist…
The Federal government has said that it is willing to lend or backstop up to $7.4 trillion to get the credit markets moving again. This figure comes from Bloomberg as a tally of all the commitment ALREADY made. Note that many of these have not been drawn down, hence the Fed’s and Treasury’s balance sheet have not (yet) expanded correspondingly. And some of these are in the form of guarantees, such as $1.4 trillion by the FDIC. Note the Bloomberg article fails to provide a tidy table showing how it came up with this figure. Critics will argue that the mixing of guarantees and borrowing facilities is an apples and oranges comparison, but the flip side is that the guarantees are treated by the authorities as a cost-free exercise, which is also incorrect.
From later on in the same post….
US debt to GDP stood at 350%. as of March 31, 2008. There are some items that are arguably overstated (lines of credit are included at their full amount, but second and third mortgages not included, and perhaps most important, contingent exposures like AIG’s credit default swap guarantees). It isn’t unreasonable to assume they net out.
The Fed’s proposed intervention is a bit more than half of GDP. However, note it (and the Treasury) has already made, and will continue to make, considerable commitments to non-US parties. AIG., for instance, has over $300 billion in CDS exposures in guarantees that permit European banks to evade minimum capital requirements (and AIG also has other, substantial non-US exposures). Similarly, the most likely cause of a Citi meltdown would be withdrawals of uninsured deposits, which were primarily overseas. Moreover, the Fed has also provided considerable indirect support to non-US entities via providing unlimited dollar swap lines to other central banks.
That is a long winded way of saying that not all of that $7.4 trillion applies to exposures that fall in the 350% debt to GDP figure cited above. Just to pick a number, say $6 trillion of the total goes to US debt. The US debt was $49 trillion. The Fed can commit less than 1/8 of the outstanding debt to solve the problem
As a nation we owe more then we can ever afford to pay. This comes from growing debt faster then GDP for many years. There are only to ways out of this mess. We can inflate our way out or we can allow many people to default. There is no third choice.
As for me, I prefer the default option to the massive inflation. At least under the default option there is a chance that the people who caused this mess will suffer more then those who played it straight. By contrast, massive inflation will benefit those with heavy debt and wipe out those who tried to save.
Given that the US is a democracy and a net debtor nation, I have no doubt about which solution this nation will chose in the end.
